Angry about CEO bonuses? Look at their falling net worth, too

BusinessWeek reports on lingering resentment among investors and rank-and-file workers over huge pay packages for CEOs presiding over companies whose shareholders watch their portfolios shrivel like a raisin in the sun. "Michael Jeffries of Abercrombie & Fitch (ANF) saw his pay climb 39 percent last year, even though the retailer's stock fell 72 percent and it has trimmed staff. (Abercrombie declined to comment.)"

But Abercrombie is a bad example to use in this case. Here's why: The company's latest proxy statement shows that Jeffries owns 6,359,766 shares -- 6.82 percent of the company, worth about $475 million in early 2008, when shares traded in the $75 range. When the stock bottomed out last November, at $13.66 a share, his stake was worth $86 million, less than one-fifth of its earlier value. In the context of that kind of scalding bath, Jeffries's $4.5 million raise was probably cold comfort.

The best way to align the interests of executives with shareholders is to require CEOs to invest in large long-term stakes in the companies they manage -- preferably, stakes that represent the vast majority of their net worths. If boards of directors can make that happen, the year-to-year swings in bonuses hardly matter. (Bonuses will still stoke the fires of populist anger, but rational shareholders will see the forest.)

Better still, executives will be motivated by longterm shareholder value, instead of short-term bonus targets that may not be aligned with longterm value. Abercrombie is a great example: Jeffries made a strategic decision to cede market share to companies like Aeropostale and American Eagle Outffiters, because those companies were discounting their merchandise aggressively, whereas he felt discounting would harm Abercrombie's longterm brand.

As it turned out, Abercrombie and Hollister absorbed body blows to their same-store sales numbers, and the stock tanked. Maybe Jeffries's move will prove brilliant in the long run, or maybe it will prove stupid -- but whatever the result, it was motivated by longterm thinking. Toggling bonuses up and down based on short-term performance might have led to a different, more shortsighted decision.

It's just something to think about: When you hear about a CEO's pay in 2008, look at the proxy statement, and do a back-of-the-envelope calculation of how much that executive's net worth plunged in 2008. It will probably tell a very different story from the sensationalist narrative -- CEO gets millions while shareholders get hosed! -- that's become so popular.